9 Markets in Backwardation and Contango

At the beginning of the year, we came out with some serious and some not so serious suggestions to play the Crude Oil inevitable rebound, one of them included buying a contract 12 to 18 months out instead of trying the ever so popular oil ETF $USO.

The ideas of contracts at different months with different prices, expiring on different days is something our equity market friends aren’t that familiar with. Let’s take Crude Oil for instance. If one was to buy an April 2015 contract, it would be priced at 49.28, compared to a contract set to expire in September of 2015 priced at 58.00. For a more visual display of such a difference, here’s the price difference of contracts every 6 months (March ’15, September ’15, February 2016, and July ’16). For the most part the contracts trade at the same level until these become the front month contract, and in so, become the most liquid contract to trade.

Crude Oil 6 months(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Barchart

This is just one of many ways to chart the differences in prices of contracts by month. Charting out the price difference by months chronologically would display what’s called a “price curve.” This curve is actually incredibly important to some managed futures strategies because some of their strategies are based solely if a market’s price is higher or lower in the further out months. We in the biz like to use the phrases Backwardation and Contango. Back in 2013, we went into detail on the definitions of the two, but the Sparknotes version is that a downward sloping price curve (further out prices are lower than current/nearer prices) is called backwardation and that an upward sloping curve where prices are higher and higher the further out in time you go is called Contango.

Simple enough. But here’s where things get a little tricky. If the market is in Contango, the investors in ETFs following that market typically see underperformance from that market structure itself. This is because the ETF has to pay the roll yield, which means they have to sell the contract before it expires at the lower price and buy the further out contract at a higher price. Last year we looked at which markets are in Backwardation and Contango, and here’s an update:

Markets in Contango:

Crude(Disclaimer: Past performance is not necessarily indicative of future results)

Coffee(Disclaimer: Past performance is not necessarily indicative of future results)

US Dollar(Disclaimer: Past performance is not necessarily indicative of future results)

Corn(Disclaimer: Past performance is not necessarily indicative of future results)

Wheat(Disclaimer: Past performance is not necessarily indicative of future results)

Markets in Backwardation:

Emini SP(Disclaimer: Past performance is not necessarily indicative of future results)

10yr note(Disclaimer: Past performance is not necessarily indicative of future results)

Mixed Markets:

Gold(Disclaimer: Past performance is not necessarily indicative of future results)

Lean Hogs(Disclaimer: Past performance is not necessarily indicative of future results)

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.